The home is often an individual’s most significant asset. And, when it comes to estate planning, people are often concerned about how the home can be passed on to heirs with out significant estate tax implications.
There are a variety of available planning techniques. One option is to transfer modestly valued real estate outright to children during one’s lifetime if significant appreciation in value is anticipated in the future. This is called an estate tax “freeze,” whereby future appreciation will not accrue in an individual’s estate.
Another alternative is to make a lifetime transfer of the property to an irrevocable trust. There are also a myriad of advanced real estate transfer techniques that offer additional benefits.
An individual may consider transferring his or her personal residence to a Qualified Personal Residence Trust (“QPRT”). A QPRT is an irrevocable trust that is designed to hold all or a portion of one’s primary residence or vacation home. The way it works is as follows: The individual who transfers the real estate to a QPRT is called the “Grantor” or “Settlor.” The Grantor retains the right to live in the residence for a certain number of years. After the term of years expires, the property passes to the beneficiaries (typically the children) named in the trust.
There are two essential tax benefits resulting from the transfer of a residence to a QPRT. First, the value of the residence for gift tax purposes will be fixed and will be based on the value of the property at the time that the trust is established, even though the beneficiaries of the trust will not actually receive the residence until some time in the future when the value may be significantly higher.
In addition, the value of the residence for gift tax purposes will be reduced by the value of the Grantor’s term interest. In other words, the fair market value of the property at the time of the transfer will be discounted in order to reflect the value of the Grantor’s retained right to use the property during the term of the trust.
If the Grantor lives through the end of the term of the trust and all other requirements are met, the residence will not be considered part of the Grantor’s estate for estate tax purposes. However, if the Grantor fails to survive the term of the trust, the residence will be included in the grantor’s estate.
Accordingly, when contemplating the use of such a trust, it is important to balance the term of the trust and the Grantor’s life expectancy. The greater the term of the trust (i.e., the length of years that the Grantor is entitled to remain in the house), the larger the discount, thereby resulting in a reduced gift tax. However, if the Grantor does not outlive the term of the trust, the residence will be included in the grantor’s estate with no tax savings.
Nonetheless, it should be noted, that if nothing was done, and if the home remained in the individual’s name, the home would certainly be a part of his/her taxable estate.
Clearly, transferring a residence to a QPRT is a good option for certain individuals, but it is not a viable plan for everyone. Nonetheless, it is an option to explore with an experienced estate planning and elder law attorney in order to determine the optimal way to reduce estate taxes for his/her loved ones.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The firm has offices in Forest Hills, Great Neck, and Brooklyn, NY. Mr. Fatoullah has been named a “fellow” of the National Academy of Elder Law Attorneys and is a former member of its Board of Directors. He also serves on the Executive Committee of the Elder Law Section of the New York State Bar Association. Mr. Fatoullah has been Certified as an Elder Law Attorney by the National Elder Law Foundation. Mr. Fatoullah currently chairs the Legal Committee of the Alzheimer’s Association, LI Chapter and is a co-founder of Senior Umbrella Network of Queens. This article was written with the assistance of Debby Rosenfeld, Esq., a senior staff attorney at the firm. The firm can be reached by calling 718-261-1700 or 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. * Certified as an Elder Law Attorney by the National Elder Law Foundation.
